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Dividend tax credit - am I going mad?

Dividend tax credit - am I going mad?

I completed a tax return today with the following entries on:

Salary 6,000
Dividends 55,000 (gross)
Qualifying loan interest expense (10,000)
STI 51,000
Personal allowance (6,475)
Taxable income 44,525

The software calculated the tax borne correctly, but then only allowed around 4,400 of the dividend tax credit to be relieved against the liability!

Am I correct to assume this is a glitch and that the full 5,500 should be deducted to arrive at the liability?

I look forward to hearing from fellow members about this, thanks on advance for your comments.

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28th Nov 2011 23:41

It is correct

All of the taxable income consists of dividends.

He is due to pay aditional tax on £7,125 of £1,603.12 so only receives a tax credit which matches the taxable figure @ 10%

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By BKD
29th Nov 2011 08:15

I was slightly confusd by Marion's post

But got there in the end!

I think it is easier just to consider that since the taxable income (all dividend) is only £44,525, the tax credit cannot exceed 10% of that sum, ie £4,453.

 

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29th Nov 2011 12:45

The dividend tax credit is non-refundable

Which means that whilst it can decrease the amount of tax owed it cannot be used to create a refund.

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29th Nov 2011 14:19

Sorry BKD

It made sense when I wrote it - but you have both explained it simpler - I should have said £44,525 instead of taxable figure!!!

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29th Nov 2011 20:23

This doesn't seem fair though
Are you quite sure?

I ask because this creates a balancing payment of approximately £1,500 which seems unfair because they have suffered tax on their dividends totalling £5,500 and only had relief for £4,475 approx.

If the income was all earned income - eg salary - then they would get relief in full for all the tax suffered.

The dividend tax credit does by create a repayment it merely reduces te liability.

I'm still confused!

Thanks for the answers so far though ;)

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29th Nov 2011 20:43

It is correct

The higher rate liability created cannot be reduced by using the notional tax credit.

Notional tax credits were introduced when ACT stopped in order to prevent a basic rate tax payer suffering any addtional liability on dividends and savings income - building society interest used to have a notional credit too. No actual tax is paid by the company to frank the dvidend.

The plan was always for any higher rate to be payable in these circumstances

 

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By BKD
29th Nov 2011 20:49

Yes, we're all quite sure!

It may not seem fair, but that's the way that it is.

Income tax deducted from earned income has actually been suffered by the taxpayer, and can therefore be repaid. That is the difference - dividend tax credits are notional and haven't been borne by the taxpayer.

If you still don't believe us, have a look at ITTOIA 2005 s397(3).

EDIT: your post, Marion, and mine crossed 'in the post' !

 

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29th Nov 2011 22:36

Thanks for this
Not the answer I was hoping for, bu I appreciate your help - thanknyou.

It is now ringing some bells from my studies!

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By pawncob
29th Nov 2011 23:12

I remember when we did this sort of thing manually, and UNDERSTOOD the implications of restricting reliefs. Surely everyone has at least one client who receives dividend income and "suffers" the tax with no repayment due.

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30th Nov 2011 08:05

Maybe this helps

See here:

http://www.hmrc.gov.uk/manuals/saimmanual/SAIM5100.htm

Where it says:

"ITTOIA05/S397 (3) treats the tax credits attaching to qualifying distributions as reduced if those distributions are not brought into charge to tax. So, for example, if an individual's total income is reduced by deductions (for example, personal allowances) such that the qualifying distributions are not, or are not wholly, brought into charge to tax, the value of the tax credits attaching to those distributions are correspondingly reduced. So a person may be entitled to a tax credit whose value is nil."

I understand what you're saying, though. It's not that you feel the notional tax credit should be repayable but that it should be available to offset the liability to higher rate tax. Pawncobs comment doesn't cover this situation - we all know notional tax credits aren't actually repayable but we are used to treating them as a credit against the final liability - and that is what is lost here.

Cathy

[email protected]

 

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30th Nov 2011 09:55

*

Isn't another way of looking at this (lifting unashamedly from Marion, Pawncob and Cathy):

a) Loan interest relief is restricted to £6k

b) That means £7125 of divis fall into HRT

c) at 22.5% uplift, that makes £1603 and results in payments on a/c

d) The problem is restricted interest relief, not "loss" of dividend tax credit

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Howard Marks
05th Dec 2011 11:38

Well Said Adam

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By ringi
Howard Marks
05th Dec 2011 12:14

Can unused "Qualifying loan interest expense" be taken forward

adam.arca wrote:

Isn't another way of looking at this (lifting unashamedly from Marion, Pawncob and Cathy):

a) Loan interest relief is restricted to £6k

b) That means £7125 of divis fall into HRT

c) at 22.5% uplift, that makes £1603 and results in payments on a/c

d) The problem is restricted interest relief, not "loss" of dividend tax credit

Can the unused "Qualifying loan interest expense" be offset again next year’s salary?  (E.g. can someone that is not a “sole trader” take forward a loss?)

And they tell us that tax does not have to be taxing…

 

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